Wednesday, November 19, 2008

Has the Fed changed its policy unannounced? Poole says yes.

The effective federal funds rate has deviated miles away from its Federal Open Market Committee (FOMC)-set target over the last couple of months. I, along with really smart economists like James Hamilton, have fought to explain this phenomenon. But perhaps it cannot be explained because we don’t have all of the information!

A bit from Bloomberg (hat tip reader Stephen Saines):
”The Federal Reserve's efforts to rescue the U.S. from financial collapse risks the eclipse of the central bank's benchmark interest rate as the most important signal of monetary policy.

Record injections of liquidity have driven the overnight lending rate between banks to less than half the 1 percent target set by officials last month. The gap is shifting investors' focus toward the amount of money in the banking system as a better gauge of Fed intentions, something San Francisco Fed President Janet Yellen last month called ``a kind of quantitative easing.''”
RW: Has the Fed moved toward a money growth target, rather than an interest rate target? William Poole – former President of the Federal Reserve Bank of St. Louis – accuses the Fed of not being transparent and shifting monetary policy without announcement. Although he does not speculate as to what the new policy is, he does state that by not announcing its new policy, the Fed is breaking the law.

According to Poole: “Something is happening at the Fed that has not been announced.”

Watch the video here (hat tip reader Paul Cox).

I will wait for the announcement because frankly I am confused.

Rebecca Wilder

17 comments:

  1. At this juncture I wouldn't be surprised if the Fed has implemented new monetary policy without proper notification. That's a little scary though. The target for the Fed Funds rates is exactly that, a target.

    Very interesting, great investigation work, keep us updated!

    Thanks,
    Tim

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  2. See this quote from itulip.com:

    "Quantity versus the price of money

    The reason they are targeting aggregates is that as deflationary forces intensify with debt defaults, tightening lending standards, and a shrinking pool of credit-worthy borrowers, rate targeting (the price of money) becomes less effective as a policy tool to manage inflation. Targeting money aggregates (the quantity of money) becomes a more effective tool.

    It’s the flip side of the problem that the Fed had in the late 1970s when inflation was very high. The Fed switched to targeting quantity over price then, between 1979 to 1982, because money price targeting is ineffective at the extremes of high and low inflation."

    Link:

    http://www.itulip.com/forums/showthread.php?p=48133

    Mr. Janszen was wrong about the fed not cutting rates probably because LIBOR increased and the fed was worried about ARM's resetting.

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  3. I'm going to do poole one better.

    Has the fed misused the mandates of low (price) inflation, moderate interest rates, and full employment to MAXIMIZE DEBT and give most people NEGATIVE REAL EARNINGS GROWTH and then used that debt to allow real GDP, housing prices, and stock prices to grow FASTER than they should have???

    Notice the mandates say NOTHING about wage levels, positive real earnings growth, debt levels, budget defictis, or trade deficits.

    Did greenspan have ANYTHING to do with the law that gave the fed this power???

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  4. Normally, I would disregard the second Anon's post above. But things aren't adding up...literally...and the last sentence has me perplexed.

    Some of the American readers would/should have a greater insight on that than I, but absent an answer later today, I'll dig on that. Greenspan certainly does have a lot to answer for.

    The Bank of Canada's ex Governor Dodge blurted out some months back (reference provided upon request, I'm tired and very late for bed again) that Greenspan *had* expressed musings that derivatives were (my paraphrase) 'unstable and prone to be trouble'.

    In fact, I will find that and post it later today, it may surprise some of the US readers, as it flies in the face of Greenspan's public claims. Mind you, his public defence is cause for concern as it is: (again, my paraphrase, I've tired) 'I knew nothing about them'.

    A bus driver who doesn't know the route, let alone the lay of the land.

    Charming....

    Make no mistake, I have faith in established institutions, there is far too much negative sentiment towards them, but the *captains* must take responsibility for their watch.

    S Saines

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  5. Janszen “rate targeting (the price of money)”

    NOT! It’s pervasive Keynesian gimmickry.

    (1) Economists need to be able to understand the proper distinctions between means-of-payment money and liquid assets;

    (2) know the difference between money creating institutions and financial intermediaries;

    (3) recognize aggregate demand is measured by the flow of money - not nominal GDP; recognize that INTEREST RATES ARE THE PRICE OF LOAN-FUNDS, NOT THE PRICE OF MONEY,

    (4)that the price of money is represented by the price level,

    (5) that inflation is the most important factor determining interest rates operating as it does through the demand and the supply of loan-funds.

    (6) and above all else recognize that even a temporary pegging of a series of federal funds rates over time forces the fed to abdicate its power to regulated properly the money supply

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  6. Janszen “The Fed switched to targeting quantity over price then, between 1979 to 1982, because money price targeting is ineffective at the extremes of high and low inflation”

    Monetarism has never been tried. Volcker targeted non-borrowed reserves (Bernanke targets borrowed reserves), however, the FFR brackets were widened, not eliminated. And the money supply was not controlled, it was out of control. Monetarism involves targeting total reserves.

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  7. Discussions of interest, especially short-term rates, are usually couched in terms of the “money market”. As long as this is just a “street-wise” expression confined to the business community, no harm is done.

    Unfortunately, under the influence of the Keynesian dogma, academicians have been trying for too long to analyze interest rates in terms of the supply of and demand for money. A “liquidity preference” curve is presumed to exist which represents the supply of money. In this system interest is the cost which must be paid, if lenders are to forgo the advantages of liquidity. All of this has little or nothing to do with the real world, a world in which interest is paid on checking accounts.

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  8. Interest rate pegs on governments were eliminated with the Treasury-Federal Reserve Accord in 1951.

    However, the FOMC returned to pegging governments in c. 1965, i.e., returned to the Federal funds "bracket-racket". This entailed Open Market buying operations at the ceiling/lending rate & Open Market selling operations at the floor/deposit rate), from 1965 up until July, 89. Note that during Volcker’s time, the FOMC's interest rate brackets were widened, not eliminated.

    From Aug. 1989, FOMC changed its pegging technique by using a series of specific fed funds rate targets, or interest rate "pegs" up until Oct 9, 2008.

    Now, since Oct. 2008, the FED started paying interest via "pegs" on (reserve balances)

    Regardless, the effect of tying FOMC policy to interest rate pegs is to supply additional (and excessive legal reserves or bank lending capacity) to the banking system when loan demand increases. I.e., it is inflationary.

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  9. There are 5 interest rates (ceilings tied to the Primary Credit Rate), that the Fed can directly control in the short-run; the Discount Rate charged to bank borrowers, as well as, the PDCF, ABCP, MMF, MMIFF & the bank’s “tax rebate”.

    The effect of Fed operations on all other interest rates is still INDIRECT, and varies WIDELY over time, and in MAGNITUDE.

    E.g., TSLF, (auction-collateral exchange) CPFF (3 month OIS Swap + surcharges), OMO (Treasury’s, Agency, Mortgage-backed), TAF (auction-collateral exchange), & SOMA (auction-GC exchange).

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  10. "rate targeting" (the price of money) -- JANSZEN The Keynesian training advised economists that interest was the rice of money, not the price of loan funds.

    The entire economic fraternity believes this nonsense. This concept is diametrically opposed to the truth, i.e., the "money paradox" by Alfred Marshall:

    Alfred Marshall, the Cambridge economists, is responsible for developing the cash-balances approach to money. For example, if individuals collectively desire expanding their cash balances (increasing the period over whose transactions purchasing power in the form of money is held), they will initiate a chain of events which will lead to a net reduction in their aggregate holdings of cash.

    That is, an over-all increase in the demand for money leads to falling prices, a decline in profit expectations, reduced borrowing from the banks -- and therefore a smaller volume of cash balances.

    Money thus is truly a paradox - by wanting more, the public ends up with less, and by wanting less, it ends up with more. All motives which induce the holding of a larger volume of money will tend to increase the demand for money - and reduce its velocity.

    Therefore, if there is a flight from the dollar, there will be hyperinflation in terms of dollar denominated assets.

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  11. Stephen, why disregard my post?

    How much DEBT has been produced since about 1980?

    How many people have experienced negative real earnings growth since about 1980, especially if price inflation was measured correctly and lawyers, doctors, sports players, bankers, and entertainers/media people are excluded?

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  12. "Make no mistake, I have faith in established institutions, there is far too much negative sentiment towards them, but the *captains* must take responsibility for their watch."

    I DO NOT because I believe their CONSTANT ATTEMPTS TO MAXIMIZE DEBT is THE PROBLEM!

    I agree with someone at minyanville.com (I don't remember who) that "faith in the fed" will be the last bubble to burst!!!

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  13. From:

    http://en.wikipedia.org/wiki/Alan_Greenspan

    "interrupted only from 1974 to 1977 by his service as Chairman of the Council of Economic Advisers under President Gerald Ford[citation needed]. In the summer of 1968, Greenspan agreed to serve Richard Nixon as his coordinator on domestic policy in the nomination campaign."

    I think that is correct. I think the fed mandates law was passed sometime around 1977.

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  14. Flow5, I will agree that it should say [interest] rate targeting (the price of [DEBT]).

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  15. Flow5 said: "(4) that the price of money is represented by the price level,"

    How about the price of physical currency (actual dollars with NO interest payment attached) is represented by the price level?

    Does the price of money is represented by the price level idea need to consider wealth/income inequality?

    For example and in our current situation, if price deflation set in from deflation in the amount of debt because the lower and middle class are basically broke, does it do any good for the gov't to print physical currency and give it to the RICH debtholders?

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  16. Flow5 said: "Monetarism has never been tried. Volcker targeted non-borrowed reserves (Bernanke targets borrowed reserves), however, the FFR brackets were widened, not eliminated. And the money supply was not controlled, it was out of control. Monetarism involves targeting total reserves."

    It seems to me that volcker was targeting CONSUMER DEBT.

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  17. ANON:

    Price level = an index of different prices (but none are accruately representative of the price level, i.e, GDP deflator, CPI, gold, etc. Pick your choice.

    Volcker wasn't doing anything besides smoking cigars.

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